What is Home Country Bias?
Home country bias is the tendency to allocate a disproportionate share of investments to domestic markets. Japanese stocks represent about 5-6% of global market capitalization, yet Japanese investors often hold 50%+ in domestic equities. US investors similarly overweight domestic stocks at 80%+ despite the US comprising about 60% of global markets. This bias exists across virtually every country studied.
Why Investors Stay Home
Multiple factors drive home bias: familiarity with domestic companies, absence of currency risk, easier access to information, and historically higher transaction costs for foreign investments. However, low-cost global index funds have largely eliminated the cost barrier, and currency risk tends to average out over long holding periods. The remaining drivers are primarily psychological rather than rational.
The Cost of Home Bias
Japanese investors who held only domestic stocks after the 1990 bubble waited over 30 years to recover their losses, while global equities grew substantially during the same period. Home bias concentrates risk in a single economy and forfeits the diversification benefit of uncorrelated international markets. A single global stock index fund eliminates home bias while providing appropriate exposure to every major economy.